Question

The website linked below provides an overview of monetary policy basics. Use information to discuss:

The three basic tools of monetary policy

The most commonly used tool for carrying out day to day operations

Which body within the Federal Reserve determines monetary policy

How monetary policy is carried out

https://www.federalreserveeducation.org/about-the-fed/structure-and-functions/monetary-policy/

https://www.youtube.com/watch?v=wLyh5fSTLLw&feature=youtu.be

Answer 1

The three basic tools of monetary policy are as follows

(i) DISCOUNT RATE

The discount rate is the interest rate charged by Federal Reserve Banks to depository institutions on short-term loans.

(ii) RESERVE REQUIREMENTS

Reserve requirements are the portions of deposits that banks must maintain either in their vaults or on deposit at a Federal Reserve Bank.

(III) OPEN MARKET OPERATIONS

Open market operations involve the buying and selling of government securities. The term “open market” means that the Fed doesn’t decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an “open market” in which the various securities dealers that the Fed does business with – the primary dealers – compete on the basis of price.

The most commonly used tool for carrying out day to day operations is open market operations .

since, open market operations are flexible, and thus, the most frequently used tool of monetary policy.

The monetary policymaking body within the Federal Reserve System is the Federal Open Market Committee (FOMC). The FOMC currently has eight scheduled meetings per year, during which it reviews economic and financial developments and determines the appropriate stance of monetary policy.

Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks such as the U.S. Federal Reserve.